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Petroleum Accounting: Cost classifications and Chart of Accountd
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PETROLEUM ACCOUNTING: COST CLASSIFICATION AND CHART OF ACCOUNTS Being paper presented by: Mr. Kayode Adebiyi MBA, FCA, ACTI MIoD to 400 level students of to 400 level students of DEPARTMENT OF ACCOUNTING, COVENANT UNIVESITY, OTA JANUARY 26, 2024 Mr. Kayode Adebiyi Managing Director HONEYROCK MULTICONSULT LTD 18B, BayoAjayi Street, Off Hakeem Balogun Street, Marwa Brooks Estate, Alausa, Ikeja, Lagos. 08033181225,07064078211 Email: hmlconsultancy@outlook.com
What is a cost? • A resource sacrificed or forgone to achieve a specific objective • Include all the payments and contractual obligations made by the company together with the book cost of depreciation on plant and equipment • The value of money that has been used up to produce something. 2
Cost Classification In the oil and gas industry, costs are classified either by nature and function of the costs or by the physical characteristics of the assets acquired. Classification of costs by function and nature would include such broad categories as: 3
Types of Costs (by nature) • Acquisition Costs • Exploration and appraisal costs • Development costs • Production costs • Support facilities and equipment 4
Types of Costs (by attributes) • Tangible • Intangible 5
Acquisition Costs • Acquisition costs are costs incurred to purchase, lease or otherwise acquire a property (whether proved or unproved). This includes the costs of signature or lease bonuses, options to purchase or lease properties, the portion of cost applicable to minerals when land including mineral rights and concessions are purchased in fee, brokers' fees, legal and other related costs.
Some Acquisition Costs • Signing bonus – upfront monies to governments • Legal fees • Filing/ Recording fees • Title examination • Options to purchase or lease • Broker fee • Option lapse (expense) • Shooting rights 7
Exploration and Appraisal Costs Exploration and appraisal costs are costs incurred to prospect for oil and examining specific areas that may harbour hydrocarbon reserves. They are costs that are incurred before a reservoir is developed, including depreciation, amortization and allocated operating costs of support equipment and facilities.
Some Exploration Costs • Costs of topographical, geological, and geophysical studies, rights of access to properties to conduct these studies, and salaries and other expenses of geologists, geophysical crews, and others conducting these studies. Collectively, geological and geophysical (G&G) costs. • Costs of carrying and retaining undeveloped properties such as delay rentals, ad valorem taxes on the properties, legal costs for title defense, and maintenance of land and lease records. 9
Some Exploration and Appraisal Costs C Dry hole contributions and bottom hole contribution D. Costs of drilling and equipping exploratory wells. E. Costs of drilling exploratory-type stratigraphic test wells. A., B., C. are non-drilling costs. , expense. D., E., drilling costs. Possibly capitalized, . 10
Test Well Contributions • Bottom-hole contribution: Contribution paid to a driller by adjoining property owners for information from drilling in a particular property regardless of the success or failure of the drilling. • Dry-hole contribution: This concept is the same as “bottom-hole contribution” except that payment is made only if the drilling results in a dry-hole.
Development Costs • Development costs are incurred to gain access to proved reserves and to provide facilities for extracting, treating, gathering and storage of oil and gas. They include the cost of production facilities such as platforms, down-hole and wellhead equipment, pipelines, separators, treaters,…
Development Costs tank batteries, heaters, de-salters, de-sanders, natural gas cycling processing plants, improved recovery systems and equipment. They also include depreciation and applicable cost of support equipment and facilities.
Drilling and Development Costs • Development wells • Lease flow lines • Separators • Treaters • Heaters • Storage tanks • Improved recovery system • Nearby gas processing facilities 14
Production Costs Production costs relate to costs of lifting oil and gas to the surface, treating and storing them. They include the costs of personnel engaged in operation of wells and related equipment facilities, repair and maintenance of producing facilities, materials, supplies, insurance and fuel consumed and services utilized in such…
Production Costs operations. They also include depreciation and applicable costs of support equipment and facilities but do not include depreciation, depletion and amortization (DD&A) of licence acquisition, exploration and development costs and costs of decommissioning.
Support Facilities and Equipment Support facilities and equipment include trucks, drilling equipment, construction and grading equipment, repair shops, warehouses, camps division and district or field offices. Usually, these facilities and equipment serve one or more than one activity such as acquisition, exploration, development or production. The costs are therefore capitalized and allocated to the different activities, ..
Support Facilities and Equipment each activity bearing its own proportionate share. Allocations are made, depending on the nature of support costs, using mileage, hours and other units of measurement basis. Regardless of method of allocation used, consistency of application should be paramount.
Tangible Costs and Intangible Costs Tangible costs relate to costs of assets that have physical properties. Tangible derived from the Latin word "tangere" meaning to touch implies that such assets can be touched or felt. They include machinery, equipment vehicles etc. Tangible costs also include labour to install equipment etc. even though such costs do not result in a physical asset.
Tangible Costs and Intangible Costs Intangible costs relate to costs that result in an asset that has no physical properties. Examples are contract costs paid to a contract driller for drilling a well, mud pits etc. In oil and gas operations and accounting, a distinguishing feature between classification as tangible and intangible is salvageability.
Tangible Costs and Intangible Costs If the property can be salvaged at the end of operations such properties are usually classified as tangible whereas those properties (the underlying costs) that cannot be salvaged at the end of an operation are classified as intangible. The distinction between both types of costs is usually important for tax purposes.
Chart of Accounts A chart of accounts (COA) is an index of all of the financial accounts in a company's general ledger. In short, it is an organizational tool that lists by category and line item all of the financial transactions that a company conducted during a specific accounting period.
COA - Key Points • A chart of accounts is a financial organizational tool that provides a complete listing, by category, of every account in the general ledger of a company. • It is used to organize finances and give interested parties, such as investors and shareholders, a clearer view and understanding of a company’s financial health.
COA - Key Points • To ensure the quick location of specific accounts, each COA typically contains an identification code, name, and brief description. • COAs can be modified by a company to fit its size and type of business. • It's important to use the same COA format over time for the accuracy of period-to-period comparisons.
Chart of Accounts Broad Divisions in line with Accounting Equation • Assets, Liabilities, Owner’s equity COA of an oil company is far more lengthy and complex compared to those of other industries. It also differs depending on the method of accounting – SE of FC
